Protecting Your Money in a Declining Economy (118)

Are we in the perfect financial storm? Marc Cuniberti, a market analyst and host of “Money Matters” on our local community radio station KVMR, thinks so. Marc talks about the cause of inflation (rising prices are just a symptom) and how you can stop it with a candy bar! He discusses strategies to protect and even make money in a weakening economy. Like getting out of debt, and investing in physical things you really need. In the stock market, he suggests dividend paying stocks, stressing the importance of using interest compounding in your favor: $100 saved today with an 8% return will grow to $200 in 9 years. Episode 118. [kvmr.org/programs/moneymatters]

The information in this program is not offered as investment advice. Consult a qualified financial advisor before making any investment decisions, and do your own research before investing.

Comments

I think the point to realize is that “growth” as we know it is going to cease once the supporter of it, cheap oil, is gone. People are going to have to go back to earning money from labor and production, not earning money from money. You might put your wages in a bank for safekeeping, but this notion that there will be money created out of nothing in order to keep paying “interest” and “dividends” will come to an end.

I’m not knocking gold. In times of crisis it’s price goes up and it is a good store of value. My parents told me lots of stories about what Germany was like right after WW II. The country was in shambles, no work, no food in the cities. City folk had to take all their family heirlooms and go to the farmers in the small towns to beg for eggs and vegetables. The farmers had barnfulls of rugs, silverware, paintings, etc. that city people had bartered for food. My Dad went to “study” in Switzerland, but was really working on a farm just for room and board.

I ask myself every day whether the principles espoused in “Your Money or Your Life” still hold true in this day and age of one crisis following another. Can the world get back on some sustainable track or are we headed for economic collapse? The recent 25% drop in oil prices is a direct result of reduced demand for oil and the availability of biofuels (see my comment at Conversation #78). This indicates to me that there can be some hope that we can adjust to Peak Oil gradually. Inflation though is probably here to stay.

One can seek to “inflation-proof” one’s capital by buying gold and commodities (thereby making the prices even worse through speculation), but abandoning the goal of financial independence (living off interest); or one can continue to live off interest, but try to grow that interest while readjusting one’s lifestyle to avoid those commodities that are going up in price. So far this last strategy has worked for me. When my favorite fat-free yoghurt went up in price by 12% recently, I started buying the 3% fat yoghurt which is 15% cheaper. Instead of going on a $2000 trip to America this Christmas (up from $1100 last year), I have been writing more letters to my parents (so they won’t miss me). Gasoline has climbed to $6.30 a gallon here in Japan, so I have been bicycling everywhere. I still haven’t tanked up since June 11, but I think I will have to tomorrow when I drive my wife to her work.

My point isn’t that Peak Oil is nothing to be feared. I have been so heartened by the many people interviewed here at Peakmoment who have opted out of the economic growth paradigm and have actively sought alternative, community-based lifestyles. I hope Americans will not go back to the wasteful lifestyle they had before this latest oil shock. But I am not holding my breath!

Gold holds value, it’s more like a battery then a currency. Talk to the folks in Argentina who got blindsided by runnaway inflation. Gold is the only thing that held value over any amount of time. 1oz of gold has always bought roughly 300 loaves of bread (real bread, not this wonder bread foam) since the time of Babylon. Still does.

And…it’s in your hand (if you take delivery of bullion). No banker, hedge fund gambler or bureaucrat between you and your money to stroke a pen and divest you of everything.

When you need walking around cash, you go trade a bit of it for whatever paper is passing for money at the moment.

Well, Janaia, I am very hesitant to give anyone investment advice. I feel bad enough when I lose money on my investments, it hurts even more when I have told a friend or relative what to invest in and they then lose money!

I will be honest. My porfolio is down about 15% since its high point before the subprime mortgage meltdown. But the interest/dividends have stayed the same during this period and the US dollar has actually appreciated against the Japanese Yen. During this downward drift I have been buying closed end fund shares that pay nice dividends in the neighborhood of 12% or more. There are many such closed end funds which have recently dropped in value sometimes as much as 30% because they are invested in “junk bonds” that people are avoiding right now in a flight to quality (government bonds). One such closed end fund is Calamos Convertible and High Income Fund (CHI) which has dropped from $19 a share to a little over $13 now. It pays a monthly 14 cent dividend for a return of 12.4%. Another closed end fund I have bought is Chartwell Dividend and Income Fund(CWF) which sells for $5.80 a share and has a 7.5 cent monthly dividend for a return of 15.5%.

This is a very risky strategy and I would never put all my money in such funds, but they have perked up my interest income nicely. The payouts can be changed at the fund manager’s discretion and the payouts are certainly not inflation-proof. A small part of the CWF Fund’s payout is a return of capital which isn’t as bad as it sounds when tax time comes around!

With the exception of money market funds and government bonds (low payouts), there are no risk-free investments, and commodities investments like gold and oil have to be timed just right, if you don’t want to lose your shirt when the “crisis” is over.

Of course, the mantra here at Peakmoment is that this crisis is here to stay and things will never return to normal. So if that’s the case, please ignore everything I have just said!

I think the ideal is to live off the interest from our investments, just as Joe Dominguez advocated in “Your Money or Your Life.” We’ve watched our investments in mutual funds take a very hefty nose-dive since last October. The interest from CDs and T-bills doesn’t cover inflation (at least in the U.S.). Where can one invest money that’ll return interest greater than inflation (and maybe even not be mercenary, like buying commodities)?

Gold is hyped as a safe store of value in times of crisis. But when the time of crisis has passed, it’s value plummets again. I found a nice graph which shows the price of gold since 1971 when the US dollar was disconnected from gold.

The price flew from $44 in 1971 to $850 in 1980, then dropped back to an average of $375 for 20 years until 2000. It has since rocketed to $1100 recently, but now has fallen to $800. However, if you adjust those 2008 US dollars up for inflation back to year 1980 dollars, the price of gold would have had to rise to $2200 this year just to get even to the value of gold in 1980. So over longer periods of time gold has really sucked as an investment. Of course, gold bugs only want us to look at the year 2000 to now in which gold has done very well.

I guess it’s one’s perspective. If one believes the Meltdown is imminent, having a store of gold might be a good idea. But if you want to live off the interest from your investments, gold just doesn’t cut it.

Google “Ferfal” an Argentine who posted a great deal over at Frugal Squirrel forums. He speaks of how gold worked when the Argentine peso was devalued and overnight inflation became a fact of life. In fact, a great deal of what he speaks of, from security to secure job catagories, could become uncomfortably familier here at home.

Having been through the devaluation of the Russian ruble and a couple of other currecies that got broadsided by wars, I am a big fan of bullion, at home, locked in a safe. Portable wealth with no one between it and yourself (such as a failed bank, a bureaucrat, etc)

Some of Mr. Cuniberti’s advice disturbed me a bit, too. Diversify, diversify, diversify is certainly some good old-fashioned advice. But invest in oil, precious metals and scarce commodities? That sounds a bit too mercenary to me and this speculative buying of commodities may be a significant factor in driving up prices, causing inflation. Do I want to profit from the hunger and economic pain that peak oil will soon cause throughout the world? For some, the answer is obviously a resounding yes.

The drumbeat for the old gold standard to be restored is just that, old fashioned. There isn’t enough gold in the world to underwrite all the currencies out there. Currencies are just like any other commodity. If there is low demand for or excess supply of a currency, like for the US dollar right now, the exchange rate versus scarcer or more desirable currencies is going to be hurt. This can be fixed by the Fed Bank raising the interest rate from the 2% discount rate it re-instituted to try and resurrect business confidence after the subprime mortgage debacle.

As Mr. Cuniberti says, governments are always tempted to expand the money supply to keep the economy going. They don’t print money (unless they are stupid), they push interest rates down. If Mr. Cuniberti’s Financial Sense website is rightwing, he can blame himself and the Bush administration for dropping the discount rate to below 2%, setting off the housing market bubble which just burst.

My perspective is that of a semi-retired person who has amassed some money and would like to live off the interest. So of course I favor higher interest rates and I hate inflation which erodes the value of the interest I am earning. Unfortunately (for me), that perspective is not shared by people who are heavily in debt. They want to pay low interest and like high inflation which reduces the value of the loans thay have to repay. Inflation is a tax which takes from the savers and gives to the profligate.

There is little a government can do about scarcity-driven inflation, it can only encourage conservation and try to redirect investment into alternative resources. Dropping the value of your currency is a big no-no, however.

We’ve begun listening to Financial Sense. Yes, their focus is entirely on economics, and it seems to us that’s where they’re knowledgeable and strong–not ecology, or even politics (which they also delve into).

We haven’t heard them deride global warming, but it’s believable. They acknowledge peak oil/energy decline (at least in terms of demand exceeding supply), and they advocate drilling immediately in the U.S. (Alaska and offshore). Their approach seems to be: drill and get all we need now to keep the economy going above all else. That oil would supposedly be a bridge to new oil projects coming online in about ten years.

I think they miss the underlying ecological fundamentals, especially global warming and ecosystems collapse. Nothing in their plan addresses what would change world consumption patterns–so we get a bit more oil for awhile. Won’t that make the withdrawal even harder? Do we keep the economy going at all costs and ignore that the platform we’re standing on is burning, until it’s too late?

I would make one comment on Mr Cuniberti’s recommendation of the Financial Sense website. It is a conservative website which derides the notion that Global Warming is with us right now. If they would stick to finance and not politics maybe they would be more credible.

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